Friday, January 11, 2008

State of the Market - 1/11/08

Not a good day if you are in the camp that this market just has to bounce, as all indexes started with a gap down and sank lower throughout the rest of the day. The Dow, Nasdaq, and Russell 2000 were all down close to 2%, while the S&P 500 was down a little less at 1.36%, due to some strength in the financials due to the Bank of America/Countrywide news. Perhaps the financials are putting in a little bounce here, but I cannot see it lasting. When the market is down so much even though the worst sector is on the plus side, it is not good.


Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

The bounce we were all expecting seems to have lasted all of two days. Based on what I said yesterday, I should have known it would fail. We were oversold, but not at extreme levels. The market monitor was very bearish, but not at levels that indicate a bullish turn. There is simply not enough fear out there to really put in a good bottom, and that has been demonstrated today. When everyone expects the same thing to happen, it usually doesn’t, and I think that is the case with these last two days. Bulls are still at 48% in the most recent Investors Intelligence survey – way too high for a market that is almost in crash mode. The VIX is nowhere near as high as it was in August and November. If we are going to put in a legitimate near-term bottom, we need the shorts piling on in droves and people selling out just to escape the pain. I don’t think we have had that yet. I still think it is possible in the next few weeks to form one. As this market goes lower and lower, I am sure that people like me who have been waiting to short again will get impatient and starting jumping in at any price. If this happens and everyone start thinking that they have to be short, then I think we can have a significant near-term up move.

VIXCharts from Telechart2007, Courtesy of Worden Brothers, Inc.

Speaking of shorts, it took me a lot of discipline to not jump on some this morning – I really wanted to and had some decent candidates to choose from. I ended up taking a few near the close that are what I believe are relatively low-risk, because I think there is a good chance we continue lower in the next few days. If they don’t work, I will take small losses. I am trying really hard to stick to my original plan of waiting for some stocks to get back near their 50 day moving averages before loading up again on the short side, but I am getting impatient like probably many traders. This is difficult to do right now, as I see many stocks I am watching continue to move lower and lower. It is the right thing to do, however, if I want low-risk, high-reward trades. Right now, I would say most opportunities are high-risk, with medium to low reward. The ones I took today were low-risk, with probably medium reward. But overall, I am going to do my best to continue to wait for the chances to come to me.


SXECharts from Telechart2007, Courtesy of Worden Brothers, Inc.

The mistake I really have made (and I mentioned this a few days ago) was that I really never should have gotten out of my positions in the first place. I am reminded of a passage from “Reminiscences of a Stock Operator” when the younger traders are talking to the old Mr. Partridge about how the market is going to go down and he must get out and buy his position back later. The old man’s response is simply, “Well, you know this is a bull market,” meaning of course that sitting tight and following the trend is the way to make the big money. As Livermore states, “Men who can both be right and sit tight are uncommon.”

Looking back, I was so well positioned a week ago and I let it slip away by taking my profit early. Not being through a bear-type market, I didn’t quite know how they act, so it is to be expected that I would make some mistakes. In hindsight, being pretty sure we were in a bear market, there was no reason for me to exit my positions. I still expect them to go lower. It was greed and fear, the two driving forces of Wall Street – greed to try and get a few extra points by selling and getting back in at a better price, and fear that my gains would for some reason disappear. This is a big weakness that I recognize and one I hoped to work on and improve this year. It looks like I still need work on it, and it will cost me in the short-term. This missed opportunity will be my “tuition” for the next few months, and I am still at the point that I don’t think I’ve paid all of my “tuition” to the market. I’d like to think I am around the end of junior year in my education, or starting my senior year, with not too much longer to go. I know the great traders never stop learning, and that is what I try to do as well.

Overall, it sure looks like we are going to test the August lows and there is probably a good chance we go through them. Now that the bounce everyone seemed to expect looks like it has failed, another push lower may actually be good for us. Fear may start to build as we stay oversold but keep going lower, and if fear rises, we may be able to get in position to have a true bounce that can be played for a few weeks. It certainly is not a good idea to catch falling knives here – dip buyers continue to whacked. If you have to short, I would take small positions and use tight stops. It should be interesting to see what Monday brings. Good luck!

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